Microgrid Economics: Look Beyond Average Pricing in Volatile Markets

Today’s low wholesale power prices suggest it’s a bad time to build power plants. But microgrid economics work differently. Turns out microgrids can thrive in the new wholesale market, according to Enchanted Rock (ERock).

While large generation plants are suffering, the Texas-based microgrid developer says its finding opportunity because of the agility of its microgrids. And as a result, it’s building more of them.

Thomas McAndrew, founding partner, president and CEO of Enchanted Rock (ERock), described how the company plays in volatile markets Tuesday at the Microgrid Global Innovation Forum in Washington, D.C., hosted by Smart Grid Observer.

To understand microgrid economics, it’s necessary to look beyond average wholesale market prices, and instead focus on the more granular price opportunity created by intermittent resources on the grid, he said. Fast-reacting microgrids can earn revenue by serving an electric grid that at any moment can – and does – find itself in need.

The same market is proving onerous for large generation plants, especially in Texas where ERock operates. Panda Temple Power, a large natural gas-fired power plant, filed for bankruptcy last month, citing pricing in the Electric Reliability Council of Texas (ERCOT). More recently, two large generation companies, NRG Energy and Calpine, urged the Public Utility Commission of Texas to consider wholesale market rule changes in light of a steep fall in average market prices since 2014. Average wholesale prices are being depressed by low natural gas prices and large amounts of wind energy driving negative pricing.

Despite all of this, ERock’s microgrids had a “fantastic year” by looking at the wholesale market in a more granular fashion, said McAndrew, whose company earlier this year won $10 million in institutional financing from Energy Impact Partners (EIP), a consortium of global utilities.

“It’s kind of ironic because you are seeing some of the big power plants…they are saying we can’t survive in this environment. We’re seeing the opposite,” he said.

“It’s kind of ironic because you are seeing some of the big power plants…they are saying we can’t survive in this environment. We’re seeing the opposite.”

Watching spikes and plummets

While it’s true that average prices are down, if you look at the pricing in more granular detail, in 15 minute intervals, it becomes apparent that “average price is made up of a lot of negative prices and spikes,” he said.

ERock installs natural gas-fired microgrids on business premises, many of them stores. During a power outage, the generators serve as back-up power for the businesses. The rest of the time, ERock aggregates the generators to provide service for the grid and earn revenue doing so.

The company watches for sudden market changes; for example, a simultaneous spike in load and drop off in wind production, which indicates a need for fast responding generators. ERock then turns on its natural gas generators before combined cycle power plants have time to dispatch. When the larger power plants finally come on and prices fall, ERock shuts down its generators. (ERock’s generators appear as negative load on ERCOT’s system.)

“And so, you’ll displace, especially in the shoulder months, traditional combined cycles for long periods of time. Only the most efficient can keep running,” he said.

Rapid volatility is occurring more often on the grid because of the intermittency of renewables, creating a “bimodal market,” one that favors agile resources, according to McAndrew. “It is the combination of renewables plus quick responding assets that can survive in the low average price environment.”

Microgrid economics beyond ERCOT

The granular volatility is pronounced in ERCOT, because of the vast amounts of wind energy on its grid. But McAndrew sees similar favorable microgrid economics emerging “in more and more of these markets going forward.” The company is looking to expand beyond ERCOT into New York, the Mid-Atlantic and New England.

Given the volatility created by intermittent resources, the power industry needs to stop evaluating pricing opportunity in terms of averages. “It has nothing to do with reserve margin or average prices or anything else, it’s just the changing nature of the grid, with all of these intermittent resources.”

McAndrew added: “All of those types of metrics don’t work in the market that we’re moving toward.” The new market is more about “the grid’s ability to respond quickly to short-term disturbances, than any hot August afternoon or early January morning.”

Elisa Wood is the chief editor of MicrogridKnowledge.com. She has been writing about energy for more than two decades for top industry publications. Her work also has been picked up by CNN, the New York Times, Reuters, the Wall Street Journal Online and the Washington Post.

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A microgrid is a discrete energy system consisting of distributed energy sources (e.g. renewables, conventional, storage) and loads capable of operating in parallel with, or independently from, the main grid. The primary purpose is to ensure reliable, affordable energy security for commercial, industrial and federal government consumers. Benefits that extend to utilities and the community at large include lower greenhouse gas (GHG) emissions and lower stress on the transmission and distribution system.